final admitting examination - cassi.ie filefinal admitting examination paper 3 advanced performance...

Final Admitting Examination

PAPER 3 ADVANCED PERFORMANCE MANAGEMENT

AUTUMN 2015 Thursday 3rd September 2015: 1.00 pm - 5.30 pm

APPENDICES TO SIM 2 & 3 ONLY

Note: appendices for SIM 1 are included within SIM 1 in the exam paper

Page reference

SIM 2 (VERDANT) 2 - 4

SIM 3 (BOOMTIME) 6 - 8

SIM 2: VERDANT

FAE 2015 – APM – APPENDICES TO SIM 2 & 3 ONLY of 10

APPENDIX I: VAL SUMMARY FINANCIAL INFORMATION

EXTRACTS FROM THE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31

DECEMBER

2014 €/£ ’000

2013 €/£ ’000

Notes

Revenue 21,000 20,000

Gross profit 5,250 5,000

Gross margin % 25% 25%

Operating expenses 3,500 3,450 1

Profit before tax 1,750 1,550

Tax 219 194

Profit from operations 1,531 1,356

Dividends to parent company 1,500 1,300 2

Profit retained for the year 31 56

EXTRACTS FROM THE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER

2014 €/£ ’000

2013 €/£ ’000

Notes

Property, plant and equipment 1,800 1,900

Current assets

Inventory 3,938 3,750

Accounts receivable 3,500 3,333

Cash 15 6

Sub total 7,453 7,089

Current liabilities

Accounts payable 1,338 1,250

Dividends payable 1,500 1,300 2

Bank overdraft 45 100 3

Sub total 2,883 2,650

Net current assets 4,570 4,439

Subordinated loan from Verdant plc 5,000 5,000 4

Net assets 1,370 1,339

Shareholders’ funds as at 31 December

2014 €/£ ’000

2013 €/£ ’000

Ordinary share capital 200 200

Retained earnings 1,170 1,139

Sub total 1,370 1,339

Note 1: Includes depreciation of €/£ 100,000 each year.

Note 2: Dividends are paid after year end.

Note 3: VAL has a bank overdraft facility of €/£ 500,000 which currently carries an interest rate of 5% and is

up for review and renewal by the bank each year.

Note 4: The loan from the parent company Verdant plc is non-interest bearing and is subordinated to all

other liabilities of VAL.

SIM 2: VERDANT


APPENDIX II: DRAFT HEADS OF AGREEMENT WITH LEGUME SA IN RELATION TO AGENCY

VAL to have the exclusive agency to distribute LEGUME products in Ireland.

Annual revenues based on market potential are expected to grow to €/£ 8,000,000 over a three-year

period from the existing base of €/£ 2,000,000. On this basis we expect the profile of revenues for the

next three years to be:

o 2015 - €/£ 2,000,000 (nine months)

o 2016 - €/£ 4,000,000

o 2017 - €/£ 8,000,000

Credit terms to customers are to be 60 days.

LEGUME to supply product at 75% of recommended sales price. Credit terms of one month which is the

same as for existing suppliers. VAL expected to earn a gross margin of 25% on sales of LEGUME

products.

VAL to make the following investments to support the agency:

o Additional warehousing facilities which are estimated to cost €/£ 850,000 (€/£ 100,000 in 2015

and €/£ 750,000 in 2016).

o Hold stock levels of three months sales (in line with current stock holding policy) plus a buffer

stock holding of €/£ 750,000.

o Ensure appropriate levels of sales and customer support which are estimated to cost 10% of

sales levels for the new agency.

o In addition, operating expenses are expected to increase by €/£ 100,000 each year during the

term of the new agency. No other cost increases are anticipated.

The agency agreement to start on 1 April 2015 and to have an initial term of three years. If successful it

is likely to be renewed.

SIM 2: VERDANT


APPENDIX III: NOTES PREPARED BY BRIAN LYNCH IN RELATION TO SELLING WONDERGRO IN

FRANCE

The market research firm have estimated total market demand to be 1,250,000 units. Currently there

are two French companies supplying a similar product in France and they have roughly equal market

shares.

The market research firm considered three pricing strategies for VAL:

1. Aggressive Pricing – Undercut the competition and position Wondergro as a ‘value’ alternative to

the competitor products. The discounted price would need to be in excess of 15% to have an

impact. Using this strategy the market research firm estimate VAL could obtain as much as 40%

market share.

2. Competitive Pricing – Price Wondergro in line with the competition. The market incumbents

currently sell at prices in the range €/£ 23.50 to €/£ 24.50. Using this strategy it is estimated that

VAL could obtain a market share of 16% at a price of €/£ 24 (which is the same as the market price

in Ireland).

3. Premium Pricing – Position Wondergro as a premium product emphasising the ‘green’ image of

Ireland. Pricing at a premium of 10% - 15%, the market research firm estimate that VAL could obtain

a market share of 11%.

The expected demand for the three strategies is as follows:

Pricing Strategy Sales Price (€/£) Estimated Annual Demand (units)

Aggressive 20.00 500,000

Competitive 24.00 200,000

Premium 27.00 140,000

Estimates of other relevant costs are as follows:

o VAL buys Wondergro from its parent company, Verdant plc, at a price of €/£ 15 per unit.

o Shipping costs to France are €/£ 2 per unit; however the average price drops to €/£ 1.50 for

volumes of 500,000 and above.

o The annual cost of renting a serviced office and a small warehouse in France is estimated to be

€/£ 150,000 (€/£ 200,000 if annual sales volumes are 500,000). VAL would need to maintain

three months stock in the warehouse to meet forecast demand.

o VAL would need one sales representative in France for every 100,000 sales units, subject to

having a minimum sales force of three reps. The estimated annual cost of having a sales rep

on the ground in France is €/£ 100,000 per sales rep.

END OF APPENDICES FOR SIM 2


SIMULATION 1 APPENDICES

PAGES 2 - 4

SIM 3 APPENDICES

Pages 6 - 8

SIM 2 APPENDICES

Pages 2 - 4

SIM 3: BOOMTIME


APPENDIX I: BOOMTIME HOTEL & COUNTRY CLUB – SUMMARY INFORMATION

The Receiver noted:

Luxury 200-bedroom 5-Star hotel and golf resort on a 250-acre site with mature woodland and gardens.

Over €/£ 60 million spent on developing the facility.

Championship 18-hole golf course designed by legendary golfer. Hosted Irish Open Golf Competition in

2013.

Currently generating €/£ 2,500,000 in cash flows (before debt servicing) on revenues of €/£ 10,000,000.

Exceptional revenue growth of 19.2% in 2013.

Occupancy levels above industry peer norms.

Significant turnaround in profitability in 2014 following the appointment of a new hotel manager.

Strong cost management

Financial and Operational Data

Summary Financial Information 2014

€/£ ‘000

2013

€/£ ‘000

Revenue

Rooms 6,150 6,132

Food & beverage 2,800 1,800

Golf 1,280 650

Total Revenue 10,230 8,582

Direct expenses (labour and supplies) 4,582 3,259

Gross operating profit 5,648 5,323

Administrative expenses 1,200 1,400

Repairs and maintenance cost 400 900

Sales and marketing costs 500 850

Other overheads 700 780

Depreciation 2,500 2,500

Sub total 5,300 6,430

Net income/(loss) before interest and tax 348 (1,107)

Property, plant and equipment 50,000 52,500

Summary Operational Data and KPIs 2014 2013

2014

Industry

peer

Gross margin % 55% 62%

- Rooms 64% 70% 75%

- Food & beverage 36% 41% 40%

- Golf 55% 45% 50%

Net margin % 3.4% -12.9% 7.5%

Total available rooms per annum 73,000 73,000

Occupancy rate 78% 60% 67%

Average Daily Rate (ADR) €/£ 108 €/£ 140 €/£ 180

Revenue per available room (RevPAR) €/£ 84.20 €/£ 84.0 €/£ 121

Repairs and maintenance as a % of revenue 3.9% 10.5% 8%

A website average review rating (out of 5) 4.1 4.8 4.9

Number of green fees (golf rounds) 25,600 10,000

Guest profile

- % from Ireland 85% 70%

- % from overseas 15% 30%

Return on investment 0.7% -2.1% 4.1%

SIM 3: BOOMTIME


APPENDIX II: OUTLINE OF BOOMTIME MANAGEMENT PERFORMANCE RELATED REWARD

SCHEME

The Receiver noted:

We brought in an experienced manager, Sean Molloy. He had previously managed a leading

international hotel in Dubai. We set him the task of returning the hotel to operational profitability;

significantly improving occupancy levels while protecting the brand and retaining the quality of the resort.

We put in place an attractive compensation package with a significant performance-related component

to incentivise him to achieve these goals. The compensation package comprises a base salary of

€/£80,000 plus bonus. We agreed that the bonus pool would be equal to 20% of net income (before

interest and tax) for the year and that his bonus calculation would be based on occupancy levels

achieved for the year in line with the following table:

Occupancy Level Bonus Pool Entitlement

Less than 67% Zero

67% 40%

68 - 70% 50%

71 - 73% 60%

74 - 76% 75%

77 - 80% 90%

Greater than 80% 100%

For 2014 Sean received a bonus of €/£ 62,640, calculated as 90% x (20% x €/£ 348,000).

No other members of management are entitled to a bonus.

APPENDIX III: COMPARATIVE MACRO ECONOMIC DATA*

Economic data and indicators Ireland UK China European

Union

Population (million) 4.6 64.1 1,351 333

Gross Domestic Product (GDP) (US$ bn) 218 2,522 9,240 12,730

GDP per capita (US$) 45,100 37,955 6,700 35,800

GDP growth (last 12 months) 3.5% 2.7% 7.4% 0.9%

Inflation rate (last 12 months) 0.1% 1.4% 2.1% 0.4%

Interest rate (10-year government bonds) 1.2% 1.75% 3.4% 0.4%

Unemployment rate 10.5% 5.7% 4.1% 11.4%

Currency units, per US$ - current 0.88 0.65 6.26 0.88

Currency units, per US$ - 12 months ago 0.73 0.60 6.06 0.73

* For the purposes of this exam, consider this financial information to be recent and from a relevant source.

SIM 3: BOOMTIME


APPENDIX IV: NOTES FROM MEETINGS WITH BOOMTIME’S MANAGEMENT

Extracts from meeting with Sean Molloy, Hotel Manager

“When I was hired I immediately set about driving up occupancy levels and activity in the hotel. The

more guests staying at the hotel: the higher the revenue from food and drink sales and golf green

fees. The first thing I did was to introduce an all in ‘stay-and-play’ package. This package consists

of two nights B&B, with dinner on one night and one round of golf for an all-in price of €/£ 199 per

person sharing. This was a huge success. In 2014 we sold 8,000 ‘stay-and-play’ packages. While

this pushed up revenues in the hotel I thought it would have had a bigger impact on RevPAR.

“I also put a higher focus on the golf course. It is truly a world class course. We targeted more golf

outings and corporate days. Golfers certainly know how to enjoy themselves so we had the spin off

benefit of higher bar sales. In fact the golf course has been so busy that we have had difficulty

accommodating some of our non-package guests.

“Cost control was the next area of focus for me. The hotel was spending like it was still 2008! To

give you one example. We had twelve fulltime maintenance & grounds staff costing a total of

€/£650,000 per annum. This is now subcontracted to a local builder for €/£ 350,000 per annum and

unfortunately most of the existing staff were let go. We didn’t incur any capital expenditure during

the year as I was instructed by the Receiver not to do so, in order to manage cash flows.

We cut back on attending overseas travel conferences and promotions, as I don’t think we were

getting enough return on our marketing spend. The biggest demand comes from our local market.

Victoria looks after this area so I don't think she was too happy about this.”

Extracts from meeting with Victoria Carton, Financial Controller

“Revenues were up in 2014. The ‘stay-and-play’ breaks were undoubtedly a major reason for the

increased revenue for the year. However we also benefitted from ‘The Homecoming’, a major

national government sponsored tourism initiative. About 10% of the room nights were a direct result

of ‘The Homecoming’. For the ‘stay-and-play’ breaks I allocated revenues based on normal pricing

€/£ 98 (2 x €/£ 49) for dinner; €/£ 80 (4 x €/£ 20) for breakfast; €/£ 100 (2 x €/£ 50) for golf, with the

balance allocated to rooms.

“The golf course also had higher income in 2014. The course hosted the Irish Open Competition in

2013. We paid €/£ 400,000 for the privilege of hosting this event. This cost was included in sales

and marketing expenses in 2013. The hosting of the Open also meant that the course was not in

play for three months prior to the competition.

“We focussed on tight cost control in 2014. Repairs and maintenance have been cut to the bone

with relatively little being spent on carpets, painting & upholstery and the general maintenance of the

resort.

“The previous hotel manager was made redundant in December 2013. We incurred redundancy

costs of €/£ 200,000 in 2013 in the restructuring of the business following Sean's appointment.

There has been a change in focus in the way the hotel is being run since then. He has certainly

made a difference around here but not everybody agrees with the direction the hotel has been

taking. The food & beverage manager left during the year. BOOMTIME HOTEL is a world class

premium resort and has been really popular with foreign couples seeking a luxury break in a unique

upscale country estate setting. These guests are prepared to pay top prices. Now our hotel always

seems to be full of loud golfers in the bar!”

END OF APPENDICES FOR SIM 3


PLEASE FOLD OUT FOR SIM 3 APPENDICES

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